Is Gold Becoming a Risk-Off Asset?

Gold is positioning itself contrary to risk-on assets. It has detached from the stock market -- and that's a good thing.

Stay Connected

Lately I've been writing about the negative correlation between the equity market and the precious metals market. This phenomenon has been in place since summer 2011 and has re emerged in the past few months. Since November 23, the S&P 500 (INDEXSP:.INX) is up 8% while the gold shares are down 14%, silver has lost 11% and gold 7%. For those who have studied history this should not come as a total surprise. From 1972 to 1977 and November 2000 to July 2002, precious metals and the equity market trended in opposite directions. We've postulated that precious metals and the mining shares won't begin a new bull phase until the cyclical bull market in US equities ends. We don't expect that to happen immediately, but there are some important signals beneath the surface (with the safe-havens) that we should direct our attention to.

First, let's take a look at the recent activity in a number of markets. From top to bottom we plot silver, gold, the Market Vectors Gold Miners ETF (NYSEARCA:GDX), the iShares Barclays 20+ Yr Treasury Bond ETF (NYSEARCA:TLT) and the US dollar. The first three markets have been in a downtrend since the end of September. Meanwhile, TLT and the buck began their downtrends in the middle of November. It appears that these markets have been tightly connected since the end of November. That is the bigger picture. The short-term term picture shows the US$ potentially breaking out and bonds not breaking to a new low.

Meanwhile, we should take note of the action in some other markets since late November. Both emerging markets (iShares MSCI Emerging Markets Index ETF (NYSEARCA:EEM)) and the S&P 500 have advanced, but EEM is slowing down. Commodities failed to make a new high even as the US dollar made a marginal low. As we can see, the inverse of the buck is threatening to break down and realign with commodities and Central Fund of Canada Limited (USA) (NYSEAMEX:CEF), a fund which is half gold and half silver. The rally since November is now seeing a negative divergence as emerging markets have not made a new high and the US dollar could be breaking out.

The bottom line is the action in precious metals, commodities, and the US dollar is signaling a warning for the equity market. The bond market needs to confirm this warning, and if it does, it could be the catalyst for a sell-off in equities. Keep in mind, the S&P 500 is approaching strong long-term resistance while in a state of euphoric sentiment. If you don't believe that, check the recent sentiment surveys and ignore those who don't provide hard data. By the way, public opinion on bonds (from sentimentrader.com), is only 14% bulls! Sounds like we should sell bonds and buy stocks, right?

Meanwhile, the precious metals appear likely to test major support in the coming days and weeks. There will be some more pain, but things are setting up perfectly for the next cyclical bull market. Gold is positioning itself contrary to risk-on assets. It has detached from the stock market and that is a good thing. There will likely be a transition period as precious metals find a bottom and the equity market reaches its peak. For now, look to buy precious metals if they reach an extreme oversold condition next week.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.